Highlights From APOL's Q4 Conference Call: Year-Over-Year Revenues Grew 27%

October 28, 2009 11:44 AM EDT

Apollo Group (NASDAQ: APOL) reports Q4 EPS of $1.06, 2 cents better than the analyst estimate of $1.04. Revenue for the quarter was $1.08 billion, which compares to the estimate of $1.03 billion.

Highlights From APOL's Q4 Conference Call:

• Announces SEC probe into revenue recognition.
  
• (Co-CEO) For the year we generated close to $4 billion in revenue, a 27% increase over the prior year and excluding special items, earnings per share increased approximately 49% year-over-year.
  
• In Q4 revenue grew approximately 29% to 1.1 billion and net income excluding special items grew 37% to 166 million or $1.06 per share.
  
• Additionally, during the fourth quarter Apollo Global closed its largest acquisition to-date acquiring London-based BPP. BPP's operations negatively impacted fourth quarter EPS by $0.03.
  
• Excluding special items as well as BPP, earnings per share would have been approximately $1.09, a 45% year-over-year increase.
  
• University of Phoenix, our flagship institution enrolled 102,000 new students during Q4 for total degreed enrollment of 443,000 students.
  
• Without this extra week, we estimate new enrollment growth would have been in the high teens versus the reported 23%. In addition, we saw retention improve at most degree levels.
  
• (CFO) Our Q4 results were driven by revenue increasing over 29% compared to the same period a year ago and excluding the one month of revenue contribution from our recent acquisition of BPP of $13 million, revenue growth would have been 28%.
  
• The components of this increase were primarily University of Phoenix's 22% enrollment growth combined with increased tuition rates.
  
• The special items net of tax in the fourth quarter of 2009 totaled $74 million as compared to gains net of tax of $109 million in Q4 of 2008.
  
• The four special items in Q4 of 2009 were, one, $80.5 million for our estimated settlement including all legal expenses in the qui tam lawsuit. Two, $9.4 million related to our rationalization of software. Three, 5.5 million for the cost of a currency hedge associated with our BPP acquisition. And four, the write-off through our tax provision of $4.7 million of deferred tax assets as a result of certain disallowed deductions related to share-based compensation.
  
• Operating income increased 42% to $281 million excluding the special items I mentioned. And our operating margin expanded 230 basis points to 26.1% from 23.8% a year ago.
  
• Bad debt expense increased 120 basis points to 4.2% of revenue compared to 3.0% a year ago.
  
• Finally, G&A, the increase in G&A as a percentage of revenue excluding the software write-off I mentioned earlier is predominantly due to lower compensation expense in the fourth quarter of 2008 due to the departure of certain senior executives. As a reminder that lower compensation added about
  $0.04 to last year's fourth quarter EPS.
  
• Included in our operating expense in Q4 was approximately $19 million of share-based compensation, which brought the total for the year to $68 million. Looking ahead we currently believe share-based compensation for fiscal 2010 will be approximately 65 to $70 million.
  
• Looking ahead, we expect our tax rate for fiscal 2010 excluding any discrete or one-time item adjustments including the settlement of our open tax audits to be approximately 41%.
  
• We continue to maintain a well-capitalized balance sheet and generated approximately $175 million or a 60% increase of adjusted free cash flow during the fourth quarter and $785 million or a 47% increase for the full year of 2009 compared to 2008. As a reminder, we define adjusted free cash flow, as cash flow from operations, less CapEx and changes in restricted cash.
  
• Total debt outstanding increased to $589 million at August 31, 2009 primarily due to us drawing the maximum amount, $500 million under our revolving credit facility.
  
• (Chairman, Apollo Global) We currently have a pilot program in place, which combines stronger commitment of time and energy from students upfront with more help and assistance from us prior to their formal enrollment and application for Title IV loans.
  
• During Q4 Global closed on its third transaction - the acquisition of BPP a UK-based education company. The final purchase price was 602 million. We've now been working with the BPP team for almost three months and integration is well on its way.
  
• Apollo Group acquired Insight Schools in 2006 and has invested significantly to grow this business over the last several years. During 2009 Insight generated an increased operating loss primarily due to regulatory compliance costs and additional startup expenses. While showing good revenue gains during the year, the business has encountered a number of administrative challenges, which ultimately led us to
  exit two states where they serve students.
  
• As part of our enhanced long-terms strategic plan we made the decision to explore the sale of Insight Schools as we see the need to focus more of our time on the huge and growing global secondary portion of the education market. We're early in this process and so there isn't much in the way of detail that we can provide you with right now but we'll certainly update you on any meaningful progress going forward.
  
• During our fiscal '09 the amount was 86% excluding any temporary relief for loan limit increases that we might obtain, which we estimate could decrease the percentage by about 50 to 300 basis points.
  
• In conclusion, Q4 was a positive ending to a terrific year and although both our enrollment and financial metrics reached record levels we're most excited about the progress we've made during the year on certain other key initiatives.
  
• (Q&A) And then just in terms of the guidance, I was wondering if you could just kind of elaborate in terms of the double-digit top playing growth, the breakout there between expected enrollment growth and pricing? (A)You know Andrew what we can say about that is that in general we've been asked about pricing from an industry's perspective and in Apollo Group and University of Phoenix perspective and what we've said is, is that that's going to depend on what's happening in any given year but that generally speaking we can see price increases in the sort of 3 to 5% range over time. So you can back into what that means for revenue and enrollment growth.
  
• And then just finally on the qui tam settlement, I was wondering if you can detail roughly how much the legal costs were versus the settlement? Whether there's any differential tax stream on those two elements? (A)With regard to the qui tam we - that amount includes both expected settlement and legal costs but we don't have any specific breakout to offer at this time.
  
• Hi, can you just talk about have you changed the way you recognize revenue. I mean, are you dealing anything different from the industry? Is there anything that you can make us aware of that would help shed some light on this? (A)There have been no significant changes and has been applied consistently in connection with the calendar initiative I discussed in the script in the Q4 of this year. We went from recognizing revenue on a weekly basis to a daily basis, which isn't significant. Had we not done that we would've accelerated revenue into the fourth quarter, which would be in advance of delivering the services and we think it's absolutely appropriate and that did not have a significant impact on any prior period.

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